Australian Economic News

Interesting to read that a sovereign wealth fund is so independent as to take a position against being patriotic.

$A on the outer as Future Fund gets set for rates to fall
PUBLISHED: 14 HOURS 21 MINUTES AGO | UPDATE: 12 HOURS 19 MINUTES AGO

The Future Fund is not alone in ­positioning its portfolio to be protected from a decline in the Australia dollar. Photo: Louie Douvis
JONATHAN SHAPIRO

The federal government’s $100 billion Future Fund has cut its exposure to the Australian dollar and positioned itself to profit from the Reserve Bank cutting interest rates, as the nation’s largest investors seek shelter from a deterior­ating domestic economy.

It has emerged that in the middle of this year the Melbourne-based sovereign wealth fund doubled its exposure to foreign currencies including the United States dollar, the euro and the yen. The move marks the Future Fund’s biggest-ever exposure to foreign currencies, taken just before the Australian dollar embarked on its dramatic slide.

The fund’s head of investment ­strategy and risk Stephen Gilmore told AFR Weekend that the shift into foreign ­currencies reflected the tendency of the Australian dollar to fall when market risk is rising. “The Australian dollar tends to be reasonably pro-cyclical and tends to sell off when risk assets sell off,” he said.

Collapsing prices for Australia’s key exports of iron ore and coal and a strengthening US economy has caused the dollar to slide more than 12 per cent since July. The dollar fell to a four-year low on Wednesday after national accounts showed the economy grew in the September quarter at a rate of 0.3 per cent – far slower than the 0.7 per cent expected by economists.

That has prompted some forecasters to predict the RBA’s cash rate is headed down in the new year, rather than up, as had been widely expected. A fall in interest rates would push the dollar down further. The Future Fund is not alone in ­positioning its portfolio to be protected from a decline in the Australia dollar.

State Street, one of the largest ­currency advisers to superannuation funds, said that most funds still believed the currency to be overvalued and were therefore lightening up on their hedges.

“At the moment its probably fair to say many chief investment officers think of 80¢ as being a neutral level,” State Street Global Advisor’s head of investment solutions Mark Willis said.

“On our valuation metrics we have a long-term fair value at around 70¢. It’s moving back towards that level and a lot of funds have been anticipating the slowdown in the commodities cycle, and that was communicated in a way that they wanted their hedges lightened,” he said.

Superannuation funds use currency derivatives such as hedges to protect themselves against a strengthening Australian dollar, which cuts the value of their offshore investments. About 30 per cent of the super sector’s total $1.8 trillion of investments is held in ­foreign shares and bonds.

First State Super’s head of investment strategy Michael Blaney said that taking a bigger exposure to foreign currencies was to “hedge a deteriorating domestic economy.

“We had a higher than normal level of foreign exchange exposure and that has helped to protect the downside, and hold up returns when we have seen rapidly declining ­commodity prices,” he said.

Mr Blaney said the fall in the ­currency had actually prompted them to once again increase their hedges – effectively reducing their exposure to foreign currencies. “In terms of portfolio hedges, there’s less benefit to holding foreign exchange than there was [when the currency was higher] so we are increasing our hedge levels to a more normal level, but we are not there yet.”

In addition to positioning itself to profit from the dollar’s fall, the Future Fund has added a “long Australian rates” overlay position that would ­benefit if the RBA cuts interest rates.

In the past week, four top forecasters – Deutsche Bank, Goldman Sachs, AMP and Westpac – changed their minds about the direction of interest rates in 2015, revising their views from tightening to further easing.

That would increase the value of ­government bonds, whose value rises when rates fall. Increasing its holding of bonds has proved to be the surprise performer for the Future Fund in 2014, delivering double-digit gains.

Australian bonds have delivered particularly strong returns as the ­market switched from expecting rate rises to pricing in a series of interest rate cuts. The Future Fund said its exposure to long-term rates was initiated to ­diversify the portfolio and add “value in disinflationary periods”.

“Interest rates and foreign exchange are the two topics that are most keenly debated across our team. Most people have been thinking that rates could only go one way [up], and they went down,” Mr Gilmore said.

“In more recent times, we came to appreciate the diversification prop­erties of a pure long rates exposure and we added that to our portfolio,” he said.

Australia’s 10-year bond rate fell to about 3 per cent from 4.25 per cent, resulting in double-digit gains for ­investors that took long term interest rate exposure.

REST Industry Super – which has one of the highest allocations to ­offshore assets among Australian super funds – said it has adopted a “dynamic” currency hedging policy.

“Our approach is that foreign ­cur­rency exposure is a risk that needs to be managed. We are not trying to trade the currency but manage the portfolio,” the fund’s chief operating officer Jo Townsend said.

“In simple terms: as the Australian dollar is falling, it’s getting cheaper – we are increasing our hedging and if the Australian dollar is trending up we are selling and decreasing our hedging.

“When the dollar was around parity, the risks were that it would fall, partic­ularly given our close links to China, and that’s starting to play out,” she said.

Mr Willis of State Street warned it was dangerous for investment funds to focus solely on the US dollar, given half of Australian net exposures were to assets denominated in other cur­rencies. “If you think of it in a single pair, it’s simplistic and potentially harmful – with the potential for [more] ­quantitative easing in Japan and Europe, and for those currencies going south and the US going north, which is the orthodoxy,” he said.

The Australian Financial Review

BY JONATHAN SHAPIRO
Jonathan Shapiro
Jonathan covers capital markets, finance and investing for AFR's Capital.

Australia's economy is still growing, so why does it feel like we're struggling?

December 4, 2014

Gareth Hutchens

http://www.theage.com.au/business/the-ec...200xg.html

Murray Inquiry is finally out in time for Christmas.

Financial System Inquiry's Murray report calls for major banks to hold more capital to protect against potential loan losses

David Murray's Financial System Inquiry (FSI) has made recommendations, opposed by the major banks, to lift their funding requirements.

The inquiry's final report, unveiled by its chairman Mr Murray and Federal Treasurer Joe Hockey in Sydney today, has made two key proposals that may raise costs for the major banks by billions - potentially hitting profit margins and dividends - but also assist smaller banks to compete.

A key finding of the report is that Australia's major banks sit only middle of the road by international standards in the amount of capital they hold to cover potential loan losses.

In reaching this finding, the FSI has expressly rejected research commissioned by the Australian Bankers' Association that put Australia's banks in the top quarter of institutions globally.

Federal Treasurer Joe Hockey told a press conference in Sydney today that "it is vitally important that our banks be well capitalised".

"The Murray Inquiry is recommending there be a further look at increasing those levels of capital and that's something that needs to be dealt with appropriately by the regulator," he said.

Mr Murray said the inquiry reflected on the lessons of the global financial crisis, saying even a much more modest banking crisis would cost 900,000 jobs.

"These crises impose massive costs on economies and societies, and the circumstances that assisted us during the recent global financial crisis will not be present in future crises," he said.

"In the event of a crisis, which will happen again, we want the taxpayers off the hook as far as possible."

The inquiry estimates that a realistic internationally comparable estimate of the big four banks' capital levels would be anywhere between 10-11.6 per cent, while 12.2 per cent is needed to make the top quarter.

If adopted by the Federal Government and bank regulator the Australian Prudential Regulation Authority (APRA), this change is likely to mean tens of billions of dollars in extra funds will need to be raised by the big four, lowering their profitability and potential returns to shareholders, but also making them far less likely to collapse during a major recession.
What the banks fear from Murray

The big four banks are worried because increased capital requirements will reduce profitability.

Another significant proposal that would hit the profitability of the big four and Macquarie Group - and/or potentially result in slightly higher mortgage interest rates - is a plan to lift the so-called risk weights on mortgages.

Currently, those five large institutions are able to use internal models to evaluate the risk of their mortgages and set aside what they see as an appropriate amount of capital to cover losses.

On APRA's figures, those major financial institutions only have to set aside capital provisions to cover an average of just 18 per cent of their mortgage lending, versus an average of 39 per cent for regional banks, mutual banks and credit unions.

This allows the majors to require less shareholder funds to cover potential mortgage losses and use more debt funding, which is considerably cheaper, giving them a significant cost advantage over smaller players.
Inquiry recommends floor on mortgage risks

The FSI proposes putting a minimum floor on these internally generated risk weights and, in doing so, has inferred that the major banks and Macquarie may not be sufficiently protecting themselves against the risks of a widespread housing downturn.

"A minimum average risk weight prevents very low risk weights being assigned in a manner that may not reflect the true risk of an asset," the report noted.

"The inquiry notes that models based on individual borrower characteristics rarely capture the systemic risk that can become the primary risk driver at the portfolio level."

Banks had generally been pushing for the risk weightings of the smaller players to be lowered rather than those of the big firms raised if there were to be changes in this area, but the FSI found that would not be compliant with new international financial rules, and would encourage increased mortgage risk-taking at smaller institutions.
Read More here

Australia has been on an unbroken run of economic growth for slightly over the last 2 decades. Resources was one of the surprise package of this lucky country thanks for the exaggerated demand resulting from printing of money globally and China's pump priming during the GFC.

A reversion to the hard norm is inevitable and as such had such a pronounced impact on the sentiment on the grounds.

However, resources that are not being explored and recovered will stay under ground till prices improve. In the mean time, weakening A$ has already saliently underwrite the momentum of A$ dependent segments like tourism and possibly agri-based exports since Australia remains a quality producer of farm and other farm based processed products.

Given its diversified industry base and a freely floating currency with flexible monetary policies, before anyone knows the economy will have adjusted to a certain extend. Its largely migrant population could also have a positive spin on work attitudes that are used to be labelled laid back.

Its a lucky country and the 'No Worries' attitude coupled with good work-life balance and high quality environment will continue to put it at the forth front of many OECD countries. There is little doubt that politics may be in a mess but anyone will agree that life goes on as usual since there are other mess around the globe...

From reading and road-side sources...

No Vested Interests

(07-12-2014, 08:42 AM)Boon Wrote: Australia's economy is still growing, so why does it feel like we're struggling?

December 4, 2014

Gareth Hutchens

http://www.theage.com.au/business/the-ec...200xg.html

Let's see how the luck pans out.. FTA might be the next lucky break

The lessons we have learned on recession

DateDecember 6, 2014

Ross Gittins

With the economy growing below par and spirits so flat that people have started making up new and silly terms like "technical income recession" just to spook us, it's time we put our present discontents into context.

And who better to provide it than the unfairly sacked secretary to the Treasury, Dr Martin Parkinson, who on Friday gave the last of his final speeches in a farewell tour equal to Johnny Farnham's (though well short of Nelly Melba).

On his last day in the job, Parko reflected on all the economic reforms he'd seen since he joined Treasury in 1981 and the economy's greatly improved performance since then. We are, after all, in our 24th year of growth since the severe recession of 1990-91.

Parkinson observed that about half the people of working age today weren't old enough to work at the time of that recession. They thus have little conception of how terrible recessions are. Or why oldies like me object to the R-word being invoked with such flimsy justification.

In that recession, the official unemployment rate rose from 5.8 per cent in December 1989 to 11.1 per cent in October 1992, an increase of more than 5 percentage points.

But, as Parkinson reminds us, up to that point we were used to having recessions about every seven years. In the Whitlam government's recession of the mid-1970s, which continued for some years into the Fraser government's term, the unemployment rate rose by about 4 percentage points.

Then came the Fraser government's own recession, in which unemployment rose from 5.4 per cent in June 1981 to 10.3 per cent in May 1983.

It was the era of "stop-start growth". In banging on about 23 years of uninterrupted growth, however, it's important to remember there were several periods of slower growth in that time, as Parkinson acknowledges.

Indeed, Reserve Bank governor Glenn Stevens observed recently that "but for the vagaries of quarterly national accounting we might well have called the end of 2000 a recession; we would have called the end of 2008 one, in fact I would call it that ... I think we had a recession then, but it was a brief one.

"It wasn't terribly deep and we got out of it fairly quickly. The question isn't how you can go another 23 years without a recession, it is how you have small ones and get out of them quickly."

Just so. Parkinson notes that, in 2000-01, the unemployment rate increased by about a percentage point, and during the global financial crisis of 2008-09, it went up by about 2 percentage points.

But this acknowledgement that we've had a few mini-recessions in the past 23-plus years only enhances Parkinson's point: compared with the previous 20 years, we've got vastly better at macro-economic management, at smoothing the business cycle.

"Those recessions of the 1970s, '80s and '90s were devastating to the economy," Parkinson said. "There was the direct loss to economic output of having around 5 per cent of our workforce thrown out of jobs.

"And there were the social and personal costs of increased unemployment that are more difficult to measure, but likely just as large, or larger, and more persistent, than the direct loss to economic output.

"Large numbers of people experienced long periods of unemployment following these recessions. In many cases, those long-term unemployed never worked again."

In the past 23 years we weren't knocked off course by the Asian financial crisis of 1987-88 or by the bursting of the technology bubble and subsequent recession in the United States in the early 2000s.

You can't put such a record down to good luck. So what changed to make our economic performance so much better than it had been? Parko identified three main factors.

First, all the micro-economic reforms of "product markets" (for oil, air travel, telecommunications, manufacturing, agriculture, rail, waterfront, water and electricity, bread and eggs) and "factor markets" (the exchange rate, banks and financial markets; labour market decentralisation).

These reforms not only improved the allocation of resources and so added to national income, they also made the economy more flexible in its response to economic shocks: less inflation-prone and unemployment-prone. This, in turn, made the economy's growth more stable and the macro managers' job easier.

Second, there were reforms in the way macro-economic management was conducted, with the introduction of "frameworks" (rules and targets) and greater transparency. Monetary policy (control of interest rates) is now conducted independently by the Reserve Bank, guided by an inflation target.

Fiscal policy (the budget) is now conducted according to the Charter of Budget Honesty with a "medium-term fiscal strategy" and regular reviews.

Third, the building of economic institutions with operational independence in regulating the economy (Australian Prudential Regulation Authority, Australian Securities and Investments Commission, Australian Competition and Consumer Commission and Australian Tax Office) and in advising the government (Productivity Commission).

Parkinson stressed that these reforms were "an important pre-condition for stronger and more stable growth" but the growth itself was produced mainly by Australia's businesses and households.

"Australia is not immune from economic cycles," he concludes. "But the economic reforms of the 1980s, 1990s and 2000s mean recessions will happen less frequently and be less severe, on average, than if we still had the economic policies and structures of the 1970s."

http://www.smh.com.au/business/the-econo...20vpw.html

US$ is the strongest currency in the world now but A$ is weaker than many other currencies... hence the pronounced impact... looks like its the race to the bottom for many currencies...

Australian dollar slips below US83c on US jobs data

DAVID ROGERS AND AAP
THE AUSTRALIAN
DECEMBER 08, 2014 4:02PM
THE Australian dollar has hit a fresh four-year low in afternoon trading, leaving it well on the way to testing major support from the May, 2010 low of US80.67c.

At 4pm (AEDT), the local unit was trading at US82.79c, down almost US1c from US83.76c on Friday.

China’s weaker than expected monthly imports and exports data today added to downwards pressure from narrowing interest rates differentials with the US.

With strong US jobs data boosting expectations of US interest rate hikes next year, and last week’s weak domestic GDP data fuelling expectations of domestic interest rate cuts, the spread between Aussie and US 10-year bond yields has hit an eight-year low of 75 basis points.

Earlier in the day the Aussie fell below the US83c mark after a report released at the end of last week showed the US economy created 321,000 new jobs in November, the highest monthly growth rate in nearly three years.


The Aussie dollar enjoyed a small bounce late in morning after an ANZ survey showed that the number of job advertisements rose for the sixth consecutive month, but the unit soon fell back again.

Employment ads on the internet and in newspapers were up 0.7 per cent in November and had gained 8.9 per cent in the 12 months to November.

“The US labour data on Friday was a big, big surprise and the Australian dollar dropped quite significantly along with other currencies and what we’re seeing is a little bit of consolidation,”

Easy Forex senior dealer Francisco Solar said.

Mr Solar said he expected the Australian dollar would fall further in the coming weeks, weighed down by weak local economic growth, lower commodity prices and the prospect of interest rate cuts by the Reserve Bank in the new year.

“There does seem to be a fundamental shift in the interest rate story in Australia,” he said.

“Everyone, until recently, was expecting interest rates to stay steady but now markets are talking about rate cuts in Australia.”

Meanwhile, the Australian bond market was weaker.

At noon, the December 2014 10-year bond futures contract was trading at 96.910 (implying a yield of 3.090 per cent), down from 96.935 (3.065 per cent) on Friday.

The December 2014 three-year bond futures contract was at 97.650 (2.350 per cent), down from 97.690 (2.310 per cent).

I think he is a pretty balanced writer

By William Pesek

Dec. 8 (Bloomberg View) -- As economists debate whether Shinzo Abe can end Japan’s long funk, I can’t help but wonder if another wealthy, seemingly world-beating economy isn’t headed for its own lost decade: Australia.

This mere suggestion will strike many as hyperbolic. The economy Down Under has avoided recession for more than two decades. The government enjoys a fiscal position that inspires envy in Washington and Tokyo. There remain vast resource deposits underground, while new infrastructure is coming online to extract and ship that treasure to China and elsewhere.

Australia’s good fortune, however, looks to be waning. Slowing growth in China, driven in part by the government’s efforts to rebalance the economy, has devastated commodity prices: Iron ore, Australia’s biggest export, now fetches half of the $140 per ton it did lastDecember; coal prices have tumbled as well. These are long-term, not cyclical trends. And unfortunately, the trajectory plotted by Prime Minister Tony Abbott over the last 14 months has left the country less prepared for that difficult future than when he took office.

Australian voters have soured on Abbott -- his coalition lost power in southeastern Victoria state’s election last week, leading to chatter that he might not survive a full term in office -- because of what they see as broken promises. A needlessly austere budget slashed education, health and welfare spending. The government appears to be coddling mining billionaires and backtracking on its environmental pledges. It even cut funding for national icon Australia Broadcasting Corporation.

My worry has more to do with Abbott’s economic priorities, which ignore how rapidly the world is changing around the Lucky Country. Although Abbott has talked about diversifying the economy away from its dependence on China, his policies have effectively done the opposite. Where the previous government moved to tax outsized mining profits to fund investment in education and infrastructure, Abbott has changedincentives so that commodities and mining companies become a bigger share of the economy and have an even bigger voice in politics.Scrapping plans for a carbon tax, and resisting any serious limits on emissions, has made the economy more vulnerable to international shocks and made Australia a punch line at this week’s global climate talks in Lima, Peru.

Instead of undertaking painful and costly restructuring, Abbott has prodded the central bank to loosen monetary policy more and more.Whether all that easy money is pushing Australia toward a subprime-loan crisis has now become a matter of serious debate.

Over the last year, anytime a journalist asked Abbott or Treasurer Joe Hockey about frothy real-estate prices, they were dismissed as nervous nellies. When I probed Hockey myself in September in Sydney, he derided such views as "rather lazy analysis." Yet in an interim report in July, David Murray, the former head of Commonwealth Bank of Australia, called the surge in housing debt since 1997 and banks’ exposure to mortgages a significant risk. Since that time, Murray's panel said, “household leverage has almost doubled,” and “higher household indebtedness and the greater proportion of mortgages on bank balance sheets mean that an extreme event in the housing market would have significant implications for financial stability and economic growth.”

On Sunday, in the final report to emerge from his yearlong inquiry, Murray urged specific reforms, includingcuts in much- loved housing tax breaks. The report called for “unquestionably strong” capital levels, which could force the four biggest banks to keep another $25 billion on hand for a rainy day.

There's still time for Abbott to turn things around, of course. But that would require, on the one hand, tightening up the spigot of money that’s fueling housing froth -- essentially relying less on the Reserve Bank of Australia to support growth.

On the other hand, the government needs to rethink urgently its austerity policies. Big investments in human capital -- via education and training -- as well as infrastructure are the only way to raise productivity and promote job growth in the long run. Along with re-imposing the carbon tax, the government should capture and redistribute more of the spoils of Australia's resources, replace the high income-tax burden on households with a goods and services tax, and encourage a new wave of entrepreneurship by supporting small companies.

Free-trade agreements with China and Japan are welcome. But the solution to Australia's challenges remain smart, forward- looking, and yes, costly, policy initiatives. Otherwise its citizens could be in for their own decade of unnecessary pain.

http://www.bloombergview.com/articles/20...-is-adrift

Interest rates likely to stay low: RBA board member John Edwards
JAMES GLYNN THE WALL STREET JOURNAL DECEMBER 12, 2014 12:00AM


’There is no doubt we are in a low-growth environment,’ says RBA board member John Edwards Source: AFP

AUSTRALIA’S economy will not grow strongly enough next year to prevent a further rise in unemployment, and this will require interest rates to remain low, according to John Edwards, a board member of the Reserve Bank.

Mr Edwards said the underlying momentum of the economy had not changed much this year.

“There is no doubt we are in a low-growth environment,” he said.

“It’s not enough to create jobs at a sufficiently fast rate to prevent a rise in unemployment.”

His comments came as figures released yesterday showed the unemployment rate rose to a fresh 12-year high, the latest in a string of indicators suggesting that economic growth ­remains weak.

The nation’s jobless rate rose to 6.3 per cent last month, from 6.2 per cent in October, in line with economists’ expectations.

Even so, there was a strong surge in part-time work, with numbers jumping by 40,800.

The number of people in full-time work increased by 1800, but an overall rise in the number of people looking for work drove the unemployment rate higher.

Mr Edwards said economic policymakers at the central bank and the government would need to continue to act cautiously next year.

“Were that kind of environment to continue you would hope that the federal government would not want to narrow the deficit too quickly, and you’d expect monetary conditions to remain accommodative,” Mr Edwards said.

Mr Edwards said there was room to cut interest rates if conditions warranted such a move, noting that Australia was unusual among developed economies in terms of having such high interest rates.

Were interest rates to be cut, the impact on the economy would be quick, he said. With most Australian mortgages on variable interest rates, the transfer to the economy could be fast, Mr Edwards said.

Despite evidence of a sharp slowdown in the economy in the third quarter on the back of falling investment and tumbling commodity prices, Mr Edwards said there was no reason to overreact.

“I don’t think there is ­evidence of a serious deterioration under way, but no doubt growth is slow,” Mr Edwards added.

“I think we are ending the year without very much change in the underlying momentum of the economy.”

The Australian dollar was likely to fall further next year, helping the economy, and it was getting closer to properly valued levels, “but it is not there yet”.

Recent data have pointed to falling consumer and business confidence in a country that is struggling to cope with a slowdown in mining investment that has powered the economy for much of the past decade.

Figures last week showed that the economy slowed to a crawl in the third quarter, as sharp commodity-price falls also dented export earnings.

The Westpac-Melbourne Institute Unemployment Expectations Index — which measures people’s expectations of failing to find a job or losing an existing one — surged by 4.5 per cent in ­December, following a rise of 2.7 per cent in November.

The economy is being slugged by falling bulk ore prices, too.

Iron ore, the country’s biggest export, has halved in value since January, at the same time as the dollar is overvalued, according to the central bank.

Amid the weak economic data, expectations are growing that interest rates may continue falling next year from the current record-low level of 2.5 per cent.

The Wall Street Journal

Treasury backs Glenn Stevens’ call to devalue dollar
THE AUSTRALIAN DECEMBER 12, 2014 10:38AM

Jared Owens

Reporter
Canberra
TREASURER Joe Hockey’s parliamentary secretary has backed calls by Reserve Bank governor Glenn Stevens to further devalue the Australian dollar to about 75 US cents.

Mr Stevens also challenged all federal politicians to “get real” about fixing the budget within the next five years, or risk the loss of Australia’s AAA credit rating and the imposition of European-style austerity measures.

Another RBA board member John Edwards, in a Wall Street Journal interview published in The Australian this morning, cautioned the Australian economy will not grow strongly enough next year to prevent a further rise in unemployment, and this will require interest rates to remain low.

Start of sidebar. Skip to end of sidebar.

MOREDollar sinks as Stevens tips US75c
MORERates likely to stay low
End of sidebar. Return to start of sidebar.

At 9am (AEDT), the local unit was trading at US82.67c, down sharply from US83.20c at the close of local trade on Thursday.

Mr Stevens, who has consistently maintained the currency is materially overvalued, said a number in the vicinity of US75c seemed an appropriate valuation, which means the currency would need to fall a further 9 per cent from current level.

“I think it’s quite likely that it will, a year from now, be lower than it is today,” Mr Stevens told The Australian Financial Review.

“A year ago I said probably 85 US cents was better than 95. And if I had to pick a figure now, I would say probably 75 is better than 85.”

The Treasurer’s parliamentary secretary, Steven Ciobo, said the Australian dollar was “still at historically high levels”.

“Over the longer term we do need the Australian dollar to come down further,” he told ABC Radio.

“By doing that, it will help the Australian economy to transition from being focused too heavily on mining, to being refocused again more broadly on the services side of the economy, which of course accounts for the vast bulk of the Australian economy.”

Mr Stevens called on federal politicians to host a serious debate about the medium-term budget challenge and avoid simplistic “slogans and name-calling”.

Mr Ciobo said the government did “not want to jeopardise” the AAA over the longer term.

“The fact remains that we cannot continue to keep borrowing from future generations to pay for today’s spending,” he said.

“That’s the reason why the coalition has had to take some unpopular decisions but necessary decisions ... that mean that we, over the longer term, can start living within our means.”

Mr Stevens said that, should rates be cut next year, he would hope it would be with a positive narrative relating to soft inflation and a “calmer housing market”. However, he added that the RBA held no set view on where rates would head in 2015, urging a break from rampant speculation and a “fresh look in the new year”.

The governor’s call for calm follows forecast revisions by several analysts, with Goldman Sachs, Westpac and National Australia Bank now all tipping two or more rate cuts next year.

Additional reporting: Business Spectator